Bank of England: UK economy to drop 8%, enter recession if no-deal Brexit

REUTERS/Gareth Fuller

• Bank of England has released an apocalyptic no deal
  Brexit scenario.
• Under a “disorderly” Brexit scenario, the UK economy
  could shrink 8% in a single year, its worst recession since at
  least the Second World War.
• The pound could also fall 25% to the lowest level
  against the dollar in history.
• Unemployment and inflation would also surge, with
  unemployment hitting 7.5%, almost double its current
  rate.

The Bank of England on Wednesday
warned that a “disorderly” no deal Brexit could push the UK into
the deepest recession seen since the Second World War, and shrink
the pound to the lowest level in its history.

An assessment of a variety of
Brexit scenarios published by the central on Wednesday afternoon
showed that UK GDP could shrink as much as 8% in a single year
under the worst case scenario, far eclipsing the slump seen in
the UK during the 2008 financial crisis. That slump was around
6.25%.

Alongside tumbling GDP, the UK
could see the pound drop 25% and fall below parity against the
dollar for the first time in history.

House prices would fall 30%,
while inflation would climb above 6%, and policymakers would be
forced to increase interest rates to 5.5%. Unemployment would
rise to 7.5%, leaving hundreds of thousands of people out of
work.

Bank of England

Under the “disorderly” scenario,
the Bank of England sees the UK losing “existing trade
arrangements that it currently has with non-EU countries through
membership of the EU.”

“The UK’s border infrastructure
is assumed to be unable to cope smoothly with customs
requirements. There is a pronounced increase in the return
investors demand for holding sterling assets. There are
spillovers across asset classes,” it added.

The Bank of England was clear
that none of the scenarios published today are forecasts of what
it thinks will happen, rather they reflect what could
happen.

“Our analysis includes scenarios
not forecasts. They illustrate what could happen not necessarily
what is most likely to happen,” it said.

“Our job is not to hope for the
best but to prepare for the worst,” BoE Governor Mark Carney said
in a press conference after the scenarios were released.

There was one small glimmer of
hope in the Bank of England’s worst case scenario, with the
central bank’s latest stress test showing that all major banks
would be able to withstand such a downturn.

“The UK banking system is strong
enough to continue to serve UK households and businesses even in
the event of a disorderly Brexit,” the Old Lady of Threadneedle
Street said.